Nonfundamentalness or missing information ? Evidence from causal-noncausal VARs in macro-finance

Abstract

This paper studies the presence of noncausal dynamics in standard macro-finance VAR models and asks whether they reflect genuine nonfundamentalness or omitted information available to economic agents but unobserved by the econometrician. To that end, we introduce a factor-filtering mixed causal-noncausal VARX approach designed to account for common macroeconomic information. We assess its performance in simulated settings, while showing also that the generalized covariance (GCov) estimator correctly recovers causal and noncausal dynamics when using several lags. Empirically, we revisit the well-known Stock-Watson monetary policy (S)VAR and show that the noncausal components detected in the baseline specification largely disappear once common factors are filtered out. Finally, we compare impulse responses from the filtered and original data to assess the transmission of monetary policy shocks and show that filtering further removes the price puzzle.